Your Provident Fund Contributions Will Be Taxed Beyond This Amount (Exceptions?)
From this financial year, the employees’ provident fund (EPF) statement is going to show two accounts within one provident fund account. One will contain the non-taxable part of the employee’s EPF contribution, while the other will have information about the taxable component, according to the Central Board of Direct Taxes (CBDT) notification.
But, this might not mean that an individual actually needs to open two different accounts; a person’s EPF UAN (universal account number) will remain the same.
The announcement and the new EPF tax rules
Finance Minister Nirmala Sitharaman had announced in the Union Budget 2021 that the interest earned on employees’ contributions by their provident fund which exceeds Rs. 2.5 lakh a year is going to become taxable. The government said that this decision won’t affect more than 1% of the tax-payers. This means that only high-earners whose basic salary per annum is over Rs. 21 lakh (Rs. 1,73,612 a month) will be affected by this move. For government employees, this EPF contribution threshold is going to be even higher. It stands at Rs. 5 lakh. This change has come into effect from the financial year 2021-22 (assessment year 2022-23).
Employers deduct 12% from an employee’s basic salary to contribute to the EPF each month, and they also add the same amount as their contribution to the EPFO. If the amount deducted from an individual’s salary as contribution is over Rs 2.5 lakh in a financial year, the interest earned on excess amount is going to be taxed according to the slab rate applicable to the individual. If an individual has made any additional, voluntary contributions throughout the year, those will also be taken into account. However, rules on implementation of this change haven’t been framed yet.
Additional compliance burden for all shareholders
Employers, employees, EPFO and private recognised PF trusts will all need to redesign their strategies. Employees will have to check the rate at which tax on interest has been withheld. EPFO, too, may also have to redesign its statement format. Employers may need to conduct audits to make sure that the calculations are as per the rules.
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